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And let me put some decimals here. So this is $1. The price is $1. It sells 100 cans per week. And probably this one would also sell about 100 cans per week. Now, what happens if we have a very, very small change in price? So if we go from $1 instead of $1, we are at $0.99. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
It sells 100 cans per week. And probably this one would also sell about 100 cans per week. Now, what happens if we have a very, very small change in price? So if we go from $1 instead of $1, we are at $0.99. What's going to happen? So remember, this machine right over here is not changing. Our demand curve is for the q... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
So if we go from $1 instead of $1, we are at $0.99. What's going to happen? So remember, this machine right over here is not changing. Our demand curve is for the quantity of Cokes sold from this machine. And the price we're talking about is for this machine. So if this machine is even a penny cheaper, and assuming tha... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
Our demand curve is for the quantity of Cokes sold from this machine. And the price we're talking about is for this machine. So if this machine is even a penny cheaper, and assuming that there aren't lines forming and things like that, people are just always going to go to this machine. If it's easy enough, if there's ... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
If it's easy enough, if there's no difference between the two, they're always going to go to this machine. So this machine will sell all of the Cokes. So it's going to sell 200 Cokes. Now, what happens if instead of lowering the price by a penny, you raise the price by a penny? So instead of $1, you're at $1. Well, now... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
Now, what happens if instead of lowering the price by a penny, you raise the price by a penny? So instead of $1, you're at $1. Well, now everyone's going to go to the other vending machine. They're going to say, oh, we don't need even a penny. I might as well walk to this one, assuming everything else is equal. So then... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
They're going to say, oh, we don't need even a penny. I might as well walk to this one, assuming everything else is equal. So then they're going to sell 0. And so what would the demand curve look like here? Well, let's plot it out. So this is the price. This axis right over here is quantity. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
And so what would the demand curve look like here? Well, let's plot it out. So this is the price. This axis right over here is quantity. And this is in cans per week. And so this is 0. This is 100. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
This axis right over here is quantity. And this is in cans per week. And so this is 0. This is 100. And then this is 200. And then this is a price of $1. That's $1. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
This is 100. And then this is 200. And then this is a price of $1. That's $1. So at $1, the quantity demanded is 100 cans. Fair enough. Now, at $0.99, the quantity demanded is 200 cans. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
That's $1. So at $1, the quantity demanded is 100 cans. Fair enough. Now, at $0.99, the quantity demanded is 200 cans. So at $0.99, the quantity demanded is 200. So $0.99 is right below that. It's 200. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
Now, at $0.99, the quantity demanded is 200 cans. So at $0.99, the quantity demanded is 200. So $0.99 is right below that. It's 200. So it's right over there. So it's like right there. It's a little bit lower. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
It's 200. So it's right over there. So it's like right there. It's a little bit lower. And at $1, a little bit over here, the quantity demanded is 0. So the demand curve here is going to look something like that. So it's going to be almost horizontal. | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
It's a little bit lower. And at $1, a little bit over here, the quantity demanded is 0. So the demand curve here is going to look something like that. So it's going to be almost horizontal. So it's going to be approaching perfect elasticity. Very small changes in price end up with these huge changes in percent quantity... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
So it's going to be almost horizontal. So it's going to be approaching perfect elasticity. Very small changes in price end up with these huge changes in percent quantity demanded. And I encourage you to work out the math to see here that you will get a very large number for elasticity. And so this is approaching perfec... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
And I encourage you to work out the math to see here that you will get a very large number for elasticity. And so this is approaching perfect elasticity. A truly perfect elasticity would be something that is a horizontal line. So in this case, so over here, our elasticity of demand, and I'll talk about the absolute val... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
So in this case, so over here, our elasticity of demand, and I'll talk about the absolute value of it, is 0. And over here, the absolute value of our elasticity of demand is infinity. Because remember, it's percent change in quantity over percent change in price. When you go from either from one scenario to another ove... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
When you go from either from one scenario to another over here, your percent change in price is very small. It's roughly about 1% in this scenario right over here. Changing the price up or down about 1%. But then you see your quantity is changing, depending on which one you're looking. Your quantity is changing on the ... | Perfect inelasticity and perfect elasticity of demand Microeconomics Khan Academy.mp3 |
So let's make, let's assume that there's three cars in the market, and what I want to do this is I sense that some people thought that I was suggesting that a car in general is an inferior good, and that's not what I was saying. I was saying if we lived in a reality where everyone owned a car, a car was a necessity for... | Inferior goods clarificationx.mp3 |
So let's say this line, this line represents the entire population in our place, in our developed country where everyone owns a car. And let's say, let's represent this car with blue. So let's say maybe a third of the people, a third of the people right now have that car. Now let's say a good chunk of the people have t... | Inferior goods clarificationx.mp3 |
Now let's say a good chunk of the people have this mid-sized sedan. This is probably the car that most people, most people would like to have. It's a little bit safer, it's a little bit larger, it's a more powerful engine. And so this is where most people are sitting. This is where most people are sitting. And then you... | Inferior goods clarificationx.mp3 |
And so this is where most people are sitting. This is where most people are sitting. And then you have this ultra, this kind of luxury, you have this luxury car, a Rolls Royce maybe. And so that, a very small segment. So this end of the line is the poor. So this is the poor in our population, and this is the rich. This... | Inferior goods clarificationx.mp3 |
And so that, a very small segment. So this end of the line is the poor. So this is the poor in our population, and this is the rich. This is the rich right over here. So this is at some given income level. And maybe we could say this is true at a particular price point, but we'll see, what we're gonna talk about is the... | Inferior goods clarificationx.mp3 |
This is the rich right over here. So this is at some given income level. And maybe we could say this is true at a particular price point, but we'll see, what we're gonna talk about is the general impact on demand. So on the entire curve, at any given price point, always assuming that this is the most expensive, this is... | Inferior goods clarificationx.mp3 |
So on the entire curve, at any given price point, always assuming that this is the most expensive, this is in between, and this is the least expensive. Now what happens if income goes up from here? Income goes up. Well, the very poorest, they're not going to be able to necessarily just trade up to this mid-sized sedan ... | Inferior goods clarificationx.mp3 |
Well, the very poorest, they're not going to be able to necessarily just trade up to this mid-sized sedan yet, although they'll maybe have more income for other things, or maybe they can get a nicer version of this. But for the most part, they're still going to be driving this car. But at kind of the boundary right ove... | Inferior goods clarificationx.mp3 |
And so these people might start buying the mid-sized car. And then what will happen over here? Well, maybe there's a few people at the boundary over here. They now have the money to afford this very expensive car, and it suits their taste. And so they also, a very small proportion also grows there. So what happened her... | Inferior goods clarificationx.mp3 |
They now have the money to afford this very expensive car, and it suits their taste. And so they also, a very small proportion also grows there. So what happened here? When income went up, the quantity demanded at a particular price point for this smallest car went down, but the demand for this mid-sized car went up. I... | Inferior goods clarificationx.mp3 |
When income went up, the quantity demanded at a particular price point for this smallest car went down, but the demand for this mid-sized car went up. It took a much bigger chunk out of this blue than a chunk was taken out of it by the orange, and also the demand for this very expensive car, and this very expensive car... | Inferior goods clarificationx.mp3 |
And so we have this phenomenon that when income went up, the quantity demanded at multiple price points for this car. So let me draw its actual demand curve. So this car right over here, this is price. This over here is demand. If its old demand curve looks something like this, if its old demand curve looks something l... | Inferior goods clarificationx.mp3 |
This over here is demand. If its old demand curve looks something like this, if its old demand curve looks something like this, we're saying, and maybe when we thought about this at first, we were thinking of the price point right over here. We noticed when income went up, at that particular price point, the quantity d... | Inferior goods clarificationx.mp3 |
So at any price point, you would have a decrease in demand. Remember, when we talk about a decrease in demand, we're talking about a shift of the entire curve. We're not talking about just one particular quantity. Now, there was another interesting question that was asked, and I think it's a very nice and subtle thing ... | Inferior goods clarificationx.mp3 |
Now, there was another interesting question that was asked, and I think it's a very nice and subtle thing to think about. I keep drawing these shifting demand curves, and if at least I understand the question properly, the question is, well, does a curve, when it shifts, does it necessarily shift perfectly, or does som... | Inferior goods clarificationx.mp3 |
And the simple answer is, it can. In fact, in very few circumstances would it probably be a perfect shift. Depending on the price point you're at, it would probably shift a little bit different. So the actual shape of the curve might change while it's shifting. But anyway, going back to this, so we see that this cheap ... | Inferior goods clarificationx.mp3 |
Here's a type of question that you might see on an AP Economics exam, and it's talking about perfectly competitive markets. So it says, a typical profit-maximizing firm in a perfectly competitive constant-cost industry is earning a positive economic profit. So the first question they ask us is, is the market price grea... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
Explain. So pause this video and see if you can answer this on your own before we do it together. All right, now let's do it together. So remember, we are talking about a perfectly competitive market. So in a perfectly competitive market, all of the players in that market have to be price-takers. They have no pricing p... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So remember, we are talking about a perfectly competitive market. So in a perfectly competitive market, all of the players in that market have to be price-takers. They have no pricing power. So the market price has to be equal to the firm's price. So market, market price, equal, equal to firm price, firm price, because... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So the market price has to be equal to the firm's price. So market, market price, equal, equal to firm price, firm price, because in perfectly, perfectly competitive market, market, firms are price-takers. Firms are price-takers. They have no pricing power. All right, part B. Draw correctly labeled side-by-side graphs ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
They have no pricing power. All right, part B. Draw correctly labeled side-by-side graphs for both the market and a typical firm, and show each of the following. And then it'll ask us to do a bunch of stuff here. So once again, pause this video, and actually get out paper. This will be very valuable for you to have a g... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
And then it'll ask us to do a bunch of stuff here. So once again, pause this video, and actually get out paper. This will be very valuable for you to have a go at this. All right, so let's see. We wanna do these side-by-side graphs, and we wanna think about the market and the firm. And we've done this in multiple video... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
All right, so let's see. We wanna do these side-by-side graphs, and we wanna think about the market and the firm. And we've done this in multiple videos before. So let's think about what they're talking about is, so this is the market right over here. That's the market. And this is, on this axis is going to be price. O... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So let's think about what they're talking about is, so this is the market right over here. That's the market. And this is, on this axis is going to be price. On this axis is going to be quantity. And then let me do a similar thing for a firm here. So that would be the firm's price axis. Price. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
On this axis is going to be quantity. And then let me do a similar thing for a firm here. So that would be the firm's price axis. Price. And then this would be quantity for the firm. Quantity. Let me make it clear. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
Price. And then this would be quantity for the firm. Quantity. Let me make it clear. This is the market. And then this right over here is the firm. And let's see, they say market price and quantity. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
Let me make it clear. This is the market. And then this right over here is the firm. And let's see, they say market price and quantity. So the equilibrium price and quantity in the market. So we could draw the supply curve for the market. It might look something like this. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
And let's see, they say market price and quantity. So the equilibrium price and quantity in the market. So we could draw the supply curve for the market. It might look something like this. Upward sloping, we've seen that multiple times. We could do the demand curve for the market. It would look something like that. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
It might look something like this. Upward sloping, we've seen that multiple times. We could do the demand curve for the market. It would look something like that. And then we have the equilibrium price in the market, which they want us to use P sub M. So P sub M. And then we have the equilibrium quantity in the market,... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
It would look something like that. And then we have the equilibrium price in the market, which they want us to use P sub M. So P sub M. And then we have the equilibrium quantity in the market, which they want us to use Q sub M. So we've done this first part. All right, now let's see what else they want. The firm's quan... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
The firm's quantity labeled Q sub F. The firm's average revenue curve labeled AR. The firm's average total cost curve labeled ATC. The area representing total cost shaded completely. So in order to do this first part, the quantity that would be rational for this profit-seeking firm, or the profit-maximizing firm to pro... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So in order to do this first part, the quantity that would be rational for this profit-seeking firm, or the profit-maximizing firm to produce, to think about that, we'd actually also have to think about the firm's average revenue. And the average revenue, which is going to be the same thing as the demand curve for that... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So this horizontal line right over there, that is the firm's average revenue, AR, which is equal to its marginal revenue, which is equal to its demand curve, which is equal to this market price. And the quantity that it's rational for this firm to produce is where this marginal revenue curve, which is also the average ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So marginal cost. And so this right over here is our Q sub F. So we've done this part and this part. The firm's average total cost curve, well, the average total cost at this quantity needs to be below the marginal revenue and the average revenue of that quantity, because we know that the firm is earning a positive eco... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So we are dealing with a situation that likely looks like this so the average total cost might look something like this. And I drew it that way to ensure that at this quantity, Q sub F, our marginal revenue and our average revenue is above our average total cost. That tells us that we're earning economic profit in this... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So I've done part four. The area representing total cost shaded completely. Well, the area representing total cost would be the cost per unit, the average cost per unit, which is that much, times the total number of units. And the total number of units is going to be this length, which is equal to Q sub F. And so your ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
And the total number of units is going to be this length, which is equal to Q sub F. And so your total cost is going to be this shaded area. If they were asking us our total economic profit, then we would be talking about this area up here, but they're not. They're talking about our total cost, which is this area right... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So we have done those parts. Now let's go to part C. If one firm in the market were to raise its price, what would happen to its total revenue? Explain. Pause this video, see if you can answer that. Well, remember, we're dealing with a perfectly competitive market, a perfectly competitive industry. There's no different... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
Pause this video, see if you can answer that. Well, remember, we're dealing with a perfectly competitive market, a perfectly competitive industry. There's no differentiation between anyone's product. So if all of a sudden, someone were to stick their head out and try to raise price, no one would buy their product anymo... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy.mp3 |
So first we have country A, and let's say it's the market for widgets. And we're going to assume that country A is not trading with anyone else. So it is an autarky, a very fancy word, which just means that this country is operating independently, it's operating in isolation. And so you can see the demand curve in this... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And so you can see the demand curve in this market in orange, and we can see the supply curve. And you can see when this country is operating in isolation, this market for widgets has an equilibrium price. It looks like it's a little bit under $4. I'll just assume that the price is in dollars per widget. And the equili... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
I'll just assume that the price is in dollars per widget. And the equilibrium quantity looks like it's about a little under four units per whatever time period we're looking at. Fair enough. Now let's look at country B, and let's assume that they are also operating independently. It's an autarky in this market. And so ... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
Now let's look at country B, and let's assume that they are also operating independently. It's an autarky in this market. And so here we can see a different demand curve than what we saw in country A, and a different supply curve. And notice, they have a different equilibrium price and quantity. So here the equilibrium... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And notice, they have a different equilibrium price and quantity. So here the equilibrium price seems to be a little bit over a dollar, and the equilibrium quantity seems to actually be not that different than what we saw in the first country, although in many situations it could be very different. Now let's imagine wh... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
Well then, you would essentially horizontally add these two demand curves, and you would horizontally add these two supply curves to come up with a new supply curve and a new demand curve. This is a little bit of a review of what we've seen in other videos, but notice, at a price of five, in total, no one's demanding a... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And similarly, you can see that with supply, that at a price of five, country A will supply five, and at a price of five, country B will supply 15, and so together, they will supply 20 units per time period. And so we can view this right over here as our supply and demand curves for the combined markets, because now th... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And notice what has happened. Our equilibrium price is now someplace in between these two equilibrium prices. So it looks like it's a little bit under $3, and our equilibrium quantity, our equilibrium quantity is a little bit under 10 units. And so you might notice some interesting things that are happening. What would... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And so you might notice some interesting things that are happening. What would happen from someone in country A's point of view, the people who are the buyers, the people who are demanding this widget? Well now, instead of having to pay almost four, they're paying someplace in between two and three. This is the new equ... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
This is the new equilibrium price if they were to open up their economy. And so what you have is, is that this amount would be produced by, in theory, by the domestic manufacturers. So the first, let's call that two and a half units. And then the remainder, where are they going to get those units from? Well, those are ... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And then the remainder, where are they going to get those units from? Well, those are going to be imports. And let's look at the equilibrium price on country B. And country B was really the lower-cost producer, and so country B, now we have a, let's put it a little bit over 2.5, so let's put it right over there. And so... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And country B was really the lower-cost producer, and so country B, now we have a, let's put it a little bit over 2.5, so let's put it right over there. And so now you have a situation where the suppliers in country B are going to be producing a lot, a lot more than they were before, and only this amount is coming from... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
And so proponents of free trade will say, hey, look, the overall consumer surplus is larger than the combined consumer surpluses that we had before. Before you had this consumer surplus in country A, and country B, it was all of this, but still, this entire area is larger than these two combined, and you could do it ma... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
Now, there will not always be winners in this. The winners here are the demanders in country A, because instead of this little small consumer surplus that they had before, now they have this much larger consumer surplus right over there, and then the other winners are the suppliers in country B, because instead of this... | Changing equilibria from trade APⓇ Microeconomics Khan Academy.mp3 |
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